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Petroleum minister Jaipal Reddy today announced a bailout package for oil companies. While the steep duty cuts will sharply impact the government's revenue kitty, consumers will have to pay higher fuel bills, which will push inflation further.
Customs duty has been eliminated on crude oil (cut from 5%) it has been cut by 5% on diesel and petrol. While the cuts are expected to lead to revenue loss of Rs 26,000 crore for 2011-12, the cut in excise duty on diesel, from Rs 4.60 per litre to Rs 2 a litre, will add a further loss of Rs 23,000 crore, leading to a total revenue loss of Rs 49,000 crore for fiscal 2011-12. The excise duty of Rs 2 per litre on diesel has been kept in lieu of additional tax.
Meanwhile, the price of diesel has been increased by Rs 3 a litre, PDS kerosene by Rs 2 a litre and domestic LPG by Rs 50 a cylinder (ex revenue yielded for oil companies Rs 21,000 crore on account of price hike).
The projected losses of oil companies despite the package will be more than Rs 1,20,000 crore for fiscal 2011-12 petroleum minister Jaipal Reddy told reporters after the meeting of the empowered group of ministers late Friday evening.
Can the government afford a dip in customs or excise collections? More importantly, how does the government make up for the losses? With markets remaining choppy, a fall back on disinvestments proceeds may not be the right alternative. How will the government make up the revenue loss? The finance ministry may be forced to hiking duties on other products like cigarettes or luxury cars that were left largely untouched in Budget 2011 to make good some of the losses, a senior finance ministry official hinted.
The finance ministry has had to depend on indirect taxes to compensate for the shortfall in direct tax collections. A dip in customs or excise will hurt fiscal deficit calculations. Customs duty on crude as well the excise collections on fuel is a significant share of the revenue kitty.
The ad valorem structure of customs duties on crude (value-based ie higher oil prices translate to higher revenues) will have an immediate impact.
While the customs duty cut will help oil companies to reduce their losses, it may not have much of an impact on pump prices of petrol and diesel. On the other hand, an excise duty cut will help reduce the shock for consumers (lower pump price) with no benefit to the oil companies. The government losses revenue on both counts. The choice therefore is difficult. Cut revenues to benefit companies or consumers?
A price hike, however, unpalatable to the political class, is imminent as there is a huge gap between retail fuel prices and that of crude oil. Indian refining companies have to import 80% of the crude oil and a hiked raw material cost brings down margins if final products like fuel continue to sell at artificially low prices.
The government's tested strategy of lowering duties to reduce the impact of high retail prices of petrol and diesel on consumers may come to play this time too. But is the government in a position to forgo revenue losses at this juncture?
The first signs of a slowdown in the economy have started showing with growth figures at lowered levels in the last quarter of 2010-11. Indications are that the growth in the first quarter of fiscal 2011-11 too is likely to be sub-8%. RBI's decision to hike bank rates, under pressure from runaway inflation, is expected to impact growth further. Add to that the prospect of a relatively poor monsoon that will leave its mark on farm growth.
Revenues for the government therefore are likely to be lower as companies turn in lower profits, even as consumption and sales slow down. Globally too, the picture is far from satisfactory. The Greek crisis coupled with the slow pick up in the US economy is not doing much to brighten India's trade revenue either.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Petroleum minister Jaipal Reddy today announced a bailout package for oil companies. While the steep duty cuts will sharply impact the government's revenue kitty, consumers will have to pay higher fuel bills, which will push inflation further.
Customs duty has been eliminated on crude oil (cut from 5%) it has been cut by 5% on diesel and petrol. While the cuts are expected to lead to revenue loss of Rs 26,000 crore for 2011-12, the cut in excise duty on diesel, from Rs 4.60 per litre to Rs 2 a litre, will add a further loss of Rs 23,000 crore, leading to a total revenue loss of Rs 49,000 crore for fiscal 2011-12. The excise duty of Rs 2 per litre on diesel has been kept in lieu of additional tax.
Meanwhile, the price of diesel has been increased by Rs 3 a litre, PDS kerosene by Rs 2 a litre and domestic LPG by Rs 50 a cylinder (ex revenue yielded for oil companies Rs 21,000 crore on account of price hike).
The projected losses of oil companies despite the package will be more than Rs 1,20,000 crore for fiscal 2011-12 petroleum minister Jaipal Reddy told reporters after the meeting of the empowered group of ministers late Friday evening.
Can the government afford a dip in customs or excise collections? More importantly, how does the government make up for the losses? With markets remaining choppy, a fall back on disinvestments proceeds may not be the right alternative. How will the government make up the revenue loss? The finance ministry may be forced to hiking duties on other products like cigarettes or luxury cars that were left largely untouched in Budget 2011 to make good some of the losses, a senior finance ministry official hinted.
The finance ministry has had to depend on indirect taxes to compensate for the shortfall in direct tax collections. A dip in customs or excise will hurt fiscal deficit calculations. Customs duty on crude as well the excise collections on fuel is a significant share of the revenue kitty.
The ad valorem structure of customs duties on crude (value-based ie higher oil prices translate to higher revenues) will have an immediate impact.
While the customs duty cut will help oil companies to reduce their losses, it may not have much of an impact on pump prices of petrol and diesel. On the other hand, an excise duty cut will help reduce the shock for consumers (lower pump price) with no benefit to the oil companies. The government losses revenue on both counts. The choice therefore is difficult. Cut revenues to benefit companies or consumers?
A price hike, however, unpalatable to the political class, is imminent as there is a huge gap between retail fuel prices and that of crude oil. Indian refining companies have to import 80% of the crude oil and a hiked raw material cost brings down margins if final products like fuel continue to sell at artificially low prices.
The government's tested strategy of lowering duties to reduce the impact of high retail prices of petrol and diesel on consumers may come to play this time too. But is the government in a position to forgo revenue losses at this juncture?
The first signs of a slowdown in the economy have started showing with growth figures at lowered levels in the last quarter of 2010-11. Indications are that the growth in the first quarter of fiscal 2011-11 too is likely to be sub-8%. RBI's decision to hike bank rates, under pressure from runaway inflation, is expected to impact growth further. Add to that the prospect of a relatively poor monsoon that will leave its mark on farm growth.
Revenues for the government therefore are likely to be lower as companies turn in lower profits, even as consumption and sales slow down. Globally too, the picture is far from satisfactory. The Greek crisis coupled with the slow pick up in the US economy is not doing much to brighten India's trade revenue either.
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